Personalised interest rates the way of the future: PwC

The use of algorithms to personalise loan structures could reshape the Australian personal lending market, according to PricewaterhouseCoopers.

Katherine Maree Pace, venture lead at PricewaterhouseCoopers, said credit-rating algorithms leverage personal data and behavioural economics to deliver a more sophisticated segmentation of a traditionally 'blanketed' middle market.

Ms Maree Pace’s comments come as Australian technology company MoneyMe considers how fintech could transform the payday lending industry, which is currently under investigation by the federal government and ASIC.

Through reference-checking algorithms that trawl big data using more touch points than the big banks, MoneyMe may have found an answer to the sector’s problems.

“The new wave of fintech is translating into cheaper prices and faster transactions across many financial service industries, leaving the end-consumer with more power than ever before,” MoneyMe CEO and co-founder Clayton Howes said.

“With payday lending widely believed to be the ‘fastest-growing part of Australia’s finance sector’, and with continued accusations of overpricing, few marketplaces present more of an opportunity for digital disruptors to step in and shake things up significantly.”

MoneyMe recently developed a sophisticated proprietary algorithm that has allowed it to become the first small-amount credit contract (SACC) provider in Australia to roll out a variable loan rate system, and cap fees and charges at half of the legislated maximum.

SACCs, as payday loans are technically termed, are consumer loans of up to $2,000, with a maximum repayment term of two years.

Lenders have traditionally charged borrowers the maximum rates allowable by law, including a 24 per cent loan cost, and late fees and default charges of up to 100 per cent of the principal.

However, MoneyMe’s algorithm has allowed them to develop the lowest-cost loan of any SACC provider in Australia to certain customers.

It has also meant MoneyMe approves just one out of five applicants, leading to a default rate within the typical two to four per cent spread of peer-to-peer lenders (though some P2P lenders go as high as 10 per cent), and significantly reduced from the 10+ per cent rates common to regular payday lenders.

Mr Howes believes algorithm intelligence may be the future for small amount loans in Australia.

“The market for small loans in Australia is growing rapidly, so there’s a clear opportunity for digital disruption to smooth out inefficiencies and offer lower-cost options,” Mr Howes said.

“Technology is now opening the door for the new wave of fintech to automate and improve processes in an industry which originated in cumbersome bricks-and-mortar storefronts.

“The reality is that incumbent lenders who are unable to quickly adapt to the disruption may find themselves unable to compete, and forced to exit the industry.”

Mr Howes said “superior technology” may see a fairer and more competitive market for small-amount consumer loans in Australia.